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The Future Of Banking: Asia-Pacific Opens Up To Open Banking

Open banking is making inroads in Asia-Pacific. A concoction of regulatory driven initiatives, market pressures from evolving consumer expectations, and increasing competition from new entrants has set the stage for wider sharing of customer data in the region. Progress across Asia-Pacific differs in nature and pace of adoption, and the regulatory spectrum varies by country. Regulatory impetus--or the lack thereof--has facilitated the evolution of the open banking framework in the region, so far.

The drivers for open banking across 20 jurisdictions where we assign bank ratings in Asia-Pacific vary significantly. In Australia, open banking is accelerating on the back of the drafting of the Consumer Data Rights legislation. This contrasts somewhat with China, where open banking is mainly flourishing in the absence of government-driven initiatives. Further, in Singapore, the central bank is creating its own set of open application programming interface (API) networks and working hand in hand with domestic banks to enable them to develop API networks on their platforms. Along similar lines, the Hong Kong Monetary Authority (HKMA), on the day of the launch of the open API framework in Hong Kong, opened up 50 sets of financial data via APIs covering statistics such as Hong Kong dollar exchange rates and interest rates.

Globally, open banking entered the limelight with the implementation of the Revised Payment Service Directive in the EU and Open Banking directive in the U.K. In the U.S., some large banking institutions, such as J.P. Morgan, Wells Fargo, and Citigroup have begun to create their own API network, and various governing bodies have published guidelines on key subjects concerning open banking.

Open banking has not yet evolved to the stage where we have changed any bank ratings in Asia-Pacific. We expect this may not occur for some time, although note that the open banking concept is developing momentum quickly. We remain vigilant as to if and how open banking may ultimately impact competitive dynamics for banks--a foundational consideration in our ratings assessments--and potentially bank ratings.

In S&P Global Ratings' opinion, open banking presents both risks and opportunities to the banking industry. By partnering with third-party service providers, banks have the opportunity to expand their platform and scope of their services to their customers, increase their relevance by developing a financial services ecosystem, and save costs by transitioning to digital channels. On the other hand, increased transparency and innovation could weigh on banks through heightened levels of competition. Retail and small and midsize enterprise (SME) customers are likely to benefit as the industry continues to evolve.

Regulatory State Of Play: Evolving Rapidly

Singapore:  In November 2016, the Monetary Authority of Singapore (MAS) released its API Playbook, which acts as a guide for developers, enlists areas of development of APIs and encourages banks to adopt the open API framework. MAS does not yet have a formal policy mandating banking institutions in Singapore to share data. However, MAS has made data available on its own website that can be used by developers. The government has launched an API Exchange, which allows data sharing amongst government agencies. Singapore banks currently have some of the largest networks of open APIs.

Australia:  Consumer data rights legislative developments are geared to giving Australians greater control over their financial data. The rollout is expected in phases and will take effect in the banking industry at first. A beta-testing phase was expected to start by July 2019 under which the major banks would be required to share product-related data for debit and credit cards, deposits, and transaction accounts in a standardized, machine-readable format. The major banks will make the first set of consumer data, including credit and debit cards, deposit, transactions and mortgages, available in February 2020.

Hong Kong:  In July 2018, the HKMA published its Open API Framework for the Hong Kong banking sector. To set an example to the industry, 70 sets of financial data and important information have been made available via API on its website since the launch date and another 60 sets will be launched by mid-2019. The regulator will phase in implementation beginning with Hong Kong's retail banks. The first phase of the plan kicked off in January 2019, which included open APIs based on product-related data for deposits, loans, and other banking services. The four phases of the open API cover product information, customer acquisition, account information, and transactions.

Japan:  In May 2017, the Banking Act was amended to introduce a framework for registration of third-party providers. The Financial Services Agency expects most lenders to have open APIs in place by 2020.

Korea:  The Financial Services Commission (FSC) has been promoting an open API in the financial industry to build infrastructure for fintech developments over the past couple of years. In August 2016, a joint open platform for the Korean banking sector was launched to provide a payment network and data services. In February 2019, the FSC proposed establishing an open payment network where all fintech payment services companies as well as banks could access and use the services at lower costs compared to the existing open platform. The FSC will also make amendments to laws to provide legal grounds for the open banking system.

India:  The country has also launched its own initiatives, largely government-led, such as the creation of a Unified Payment Interface, which has facilitated a national and interoperable payments system. There is no legislative framework for open banking as yet.

China:  There are no formal rules in place set by the regulators on open API. The development of open banking in the region has been motivated mainly by market forces. An open API framework has flourished due to the presence of technology giants such as Ant Financial and Tencent, which utilize open API to create an ecosystem around their payment applications.

New Zealand:  Payments NZ Ltd. began a pilot project to establish common API standards. Three banks--ASB Bank Ltd., Bank of New Zealand, and Westpac New Zealand Ltd.--will build and provide pilot APIs, and three third-party payment service providers--Datacom, Paymark, and Trade Me--will use the APIs. ANZ Bank New Zealand Ltd. and Kiwibank Ltd., the two other large New Zealand banks, formed part of the API working group. The commerce and consumer affairs minister has given banks until mid-2019 to get their tech up to speed and create their own security and privacy standards to safely implement open banking.

Malaysia:  The central bank, Bank Negara Malaysia, initiated public consultation and launched an open API working group in September 2018.

Taiwan:  The regulator is currently studying the framework of open banking. Though few domestic banks are trying to cooperate with other players by leveraging APIs for retail banking, the regulator still focuses on banks themselves if there are potential disputes. It is likely that the regulator will progress the open banking framework on a voluntary basis.

Goldmine Of Data On A Silver Platter

For years, banks have enjoyed sole ownership of their customers' data and have gained valuable insights from spending patterns and transaction histories. Under open banking, subject to authorization by customers, incumbent banks may also be able to access data of other banks' customers. Third-party providers may also be privy to the data.

Ultimately, we expect open banking developments to shift the competitive landscape for the banking industry. The nature and extent of this effect is not yet certain but could be profound given the fundamental changes in how data is shared and used. Access to a client's entire financial profile across multiple financial institutions could allow banks to create closely-tailored product offerings to meet each customer's unique needs and more accurately price for risk.

Broad applicability of open banking may also be applied to other industries and sectors and open up opportunities for cross industry partnerships and investments. For example a household may pay $x per quarter for its electricity provider (via provider A). In an open banking regime that has broad applicability, financial institutions would look at offers from other energy providers (e.g., providers B, C, and D) and send its clients notifications advising savings or additional features if they were to switch to an alternate provider.

Big technology companies are likewise looking for ways to leverage their existing technology and client information. We have already seen this through the "pays" (Android Pay and Apple Pay), and we expect the trend toward further startup opportunities will continue, as will partnering between banks and technology companies.

In terms of ground-level progress in the region, a large number of Asia-Pacific countries are still in the nascent stages of establishing data sharing policies. The open APIs that have been made available are mainly on informational data and not transactional data of the incumbent banks' customers. This data has been made available on a read-only basis, which primarily facilitates comparability amongst different providers.

Valuable consumer data isn't just available to banks. Today, ecommerce giants, tech companies, telecom providers, and social-networking platforms gather more data than ever before. These companies are continually channeling new ways to capture better data from their customers. For example, Ant Financials now has the ability to analyze the consumption behaviors of AliPay users to assess their credit standing, dubbed a "sesame score."

Innovation associated with open banking is not without its risks, some of which are difficult to conceptualize and quantify. An obvious risk is that associated with the mishandling of data or fraud, which could be costly for a bank from both a financial and reputational standpoint. Banks may also be disadvantaged to an extent in data sharing if regulations lack reciprocity in the nonbank or corporate sector.

Ease in data portability could also pressure some of the smaller banks that do not have the technological bandwidth or human talent to drive innovation. Further, ease of ePayments could mean customers will switch their deposits among banks and financial services companies more easily. This, in turn, could have funding implications for banks.

What Lies At The Heart Of Open Banking?

Trust. The rate of adoption by customers and financial service providers together will offer one measure to assess the success of open banking. Unless customers provide their consent to third-party providers, however, we believe that the potential for open banking to create a quantum shift across the region remains somewhat constrained. More generally, incidences of data security breaches will affect the level of comfort customers have with sharing their data. Banks, which have well-recognized brands and garnered familiarity and customer trust, to various extents, in their home markets are likely to have an edge over new local-market entrants. A key issue is whether new third-party providers--unfamiliar with operating in a comprehensive regulatory framework--will be equipped to safely deal with sensitive customer data. On the plus side, Asia-Pacific is home to swelling numbers of millennials and Generation Zers, who may be more open to trusting their data with newer firms.

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Different Pathways: Marathon For Some, Relay For Others

Banks are resorting to different strategies to adopt open banking to suit their business models. Some banks are building their own platform of open APIs, while others forming partnerships that are enabling them access to untapped market segments. Some are also creating private API networks, which can only be used by internal developers. Large Tech companies such as Google, Paypal, Alibaba, and Apple are well-placed to enter or broaden their activities in the financial services sector, leveraging their existing and growing customer relationships, technology and the data sets they are accumulating from their established businesses.

Recognizing this, banks are becoming increasingly willing to establishing partnerships with tech companies to maintain their product and service capability as customer demands for more sophisticated data driven products and services broaden and increase. This strategy is likely to help banks maintain their business positions and fend off competition to an extent from new local-market fintech entrants.

Recent Developments: Selected Asia-Pacific Banks

  • Australia-based Macquarie Bank's open platform allows its customers to share their banking data without giving login details to a third party. The platform also gives its customers the ability to manage data sharing, in real time, through the Macquarie mobile banking app; which is also currently connected with Pocketbook, a personal budgeting app. Among the major banks, National Australia Bank (NAB) has collaborated with Xero. Xero's SME customers are now able to get quicker access to funds from NAB and make faster payments directly via Xero's platforms instead of NAB's internet banking portal.
  • Singapore's DBS Bank Ltd., which was one the early adopters for open banking, now has over 200 APIs available across functionalities on its platform to make everyday actions such as cashless payments and fund transfers more convenient. Likewise, Oversea-Chinese Banking Corp. Ltd. was an early adopter in the Asia-Pacific region to launch an open API platform.
  • In Japan, the three mega banking groups--Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group, and Sumitomo Mitsui Financial Group Inc. are implementing API structures.
  • India's Kotak Mahindra Bank launched an open API platform for lending and payment products in November 2018.
  • Hua Nan bank of Taiwan has formed an open banking research team that is devoted to the development of a standardized API as proposed by the country's banking association.
  • Maybank launched a sandbox for developers to create APIs on its platform.
  • Nonghyup Bank was the first bank in Korea to launch its own open API platform in December 2015, while also participating in a joint open platform launched August 2016. The bank's API is used for various financial services including payments, remittances, peer-to-peer lending, and asset management.
  • Banks in developing Asia-Pacific jurisdictions are generally at a more nascent stage of development, noting that Union Bank of the Philippines is developing an API structure.
  • Foreign-owned banking groups have been active regionally in open banking. For example, Citibank in Asia has launched about 100 APIs to partners to help it distribute services. Its partnership with chat app Line in Thailand could give Citibank access to more than 30 million Line users in the country. By embracing partnerships, foreign banks are better able to connect with customers actively seeking their services, while at the same time targeting cost savings.

Is It Crunch Time Already?

The Asia-Pacific financial services sector is preparing for greater transparency, competition, and continuous innovation; with the endgame of better customer service. A closed operating format, which has been the maxim for banking since its inception, still holds sway, and may do so for some time. We believe open APIs offer potential benefits to traditional bank customers, including new or enhanced services at potentially lower incremental costs. Ignoring the evolving landscape, or failing to create strategies to address new changes, could leave traditional financial institutions vulnerable to disruption, and behind in their endeavors to win the customer.

We expect open banking could facilitate new distribution channels, wider customer bases, greater reach, and faster speed to market. Creating an ecosystem and leveraging third-party networks will accelerate the banks progress in this evolving environment.

Related Research

  • Hong Kong's First Virtual Bank Licenses Will Rejuvenate The Banking Sector, March 29, 2019
  • Singapore Banks Must Adapt To Fintech Or Lose Out, Feb. 20, 2019
  • The Future Of Banking: Could Fintech Transform Banking In Taiwan? June 11, 2018
  • The Future Of Banking: Will Fintech Have An Outsize Impact In Japan? Feb. 21, 2018
  • The Future Of Banking: How Much Of A Threat Are Tech Titans To Global Banks? Jan. 16, 2018

This report does not constitute a rating action.

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

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